Franchises and
Buyouts
Part 2 Starting From Scratch or
Joining an Existing Business
PowerPoint Presentation by Charlie Cook
The University of West Alabama
Copyright © 2006 Thomson Business & Professional Publishing.
All rights reserved.
Looking Ahead
After studying this chapter, you should be able to:
1.
Identify the major pros and cons of franchising.
2.
Explain franchising options and the structure of the
industry.
3.
Describe the process for evaluating a franchise
opportunity.
4.
List four reasons for buying an existing business and
describe the process of evaluating a business.
Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.
Student 4–2
Pros and Cons of Franchising
• Franchising is a formalized arrangement that describes
a certain way of operating a small business.
• The overall advantage of franchising is its high rate of
success.
• A franchise may be favored over other alternatives
because it offers training, financial assistance, and
operating benefits.
• The major limitations of franchising are its costs,
restrictions on business operations, loss of
entrepreneurial independence, and potential lack of
franchisor support.
Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.
Student 4–3
Franchising Options and the Industry
• The main parties in the franchising system are the
franchisor and the franchisee.
• The potential value of any franchising arrangement is
determined by the rights contained in the franchise
contract.
• In product and trade name franchising, the main benefit
the franchisee receives is the privilege of using a widely
recognized product name.
• In business format franchising, entrepreneurs receive an
entire marketing and management system.
Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.
Student 4–4
The Structure of the Industry
• A master licensee is a firm or individual having a
continuing contractual relationship with a franchisor to
sell its franchises.
• Multiple-unit ownership, in which a single franchisee
owns more than one unit of a franchised business, is
becoming widely used.
– Some of these single franchisees are area developers,
individuals, or firms that obtain the legal right to open several
outlets in a given area.
• Piggyback franchising is the operation of a retail
franchise within the physical facilities of a host store.
• Facilitating groups include industry associations,
government agencies, and private businesses.
Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.
Student 4–5
Sources of Franchising Information
• The substantial investment required by most franchisors
justifies careful investigation by a potential franchisee.
– Independent third parties, such as state and federal government
agencies, the International Franchise Association, and business
publications, can be valuable sources of franchise information.
• The most logical source of the greatest amount of
information about a franchise is the franchisor.
• Existing and previous franchisees are good sources of
information for evaluating a franchise.
• Sources of international franchising information include
government publications and Web sites hosted by
individual foreign countries.
Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.
Student 4–6
Franchising Contracts
• A franchise contract is a complex document and should
be evaluated by a franchise attorney.
• An important feature of the franchise contract is the
provision relating to termination and transfer of the
franchise.
• Franchise disclosure requirements are specified by FTC
Rule 436.
• The Uniform Franchise Offering Circular (UFOC)
provides the accepted format for satisfying the franchise
disclosure requirements of the FTC.
Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.
Student 4–7
Reasons for Buying a Business
• Buying an existing firm can reduce uncertainties.
• In acquiring an existing firm, the entrepreneur can take
advantage of the firm’s ongoing operations and
established relationships.
• An existing business may be available at a bargain
price.
• The entrepreneur may be in a hurry to get the business
going.
Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.
Student 4–8
Evaluating a Business
• Investigating a business requires due diligence.
• A buyer should seek the help of outside experts, the two
most valuable sources of outside assistance being
accountants and lawyers.
• The buyer needs to investigate why the seller is offering
the business for sale.
• The financial data related to the business should always
be examined.
• Nonquantitative information about the business for sale
should also be used in determining its value.
Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.
Student 4–9
Key Terms
franchising
multiple-unit ownership
franchisee
area developers
franchisor
piggyback franchising
franchise contract
disclosure document
franchise
Uniform Franchise Offering
Circular (UFOC)
product and trade name
franchising
business format franchising
matchmakers
due diligence
master licensee
Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.
Student 4–10